Tag Archives: Fractional-reserve banking

The FOUNDATION for our Debt-Based Monetary System: PROMISES to Pay that Can’t Possibly be Kept.

For the past several months, I’ve been exploring an hypothesis that strikes me as fantastic, unlikely and yet (probably) true. In broad strokes, it’s the idea that our fiat, debt-based monetary system requires ever more total debt to function. Going deeper into debt is not optional; we are forced by our debt-based monetary system to do so. I.e., if the American people ever stop going deeper into debt, the whole debt-based monetary and economic system will collapse like a junkie forced to quit heroin cold turkey.

If my hypothesis is roughly correct, the persistent growth in the National Debt (it nearly doubled under Obama) is not the result of governmental negligence or self-serving politicians who get elected by promising more “free lunches” (services purchased with debt). Instead, our National Debt must increase (perhaps geometrically) in order to feed, protect and sustain our debt-based currency and economy.

This article is conjectural. The conjecture flows from the idea that a monetary system that’s based on debt (mere promises to repay) rather than on assets (actual payments denominated in physical gold or silver) and leads us to some very strange economic implications.

For example, in a debt-based monetary system:

1) Debt is our measure of wealth. I.e., the more debt you have, the wealthier you become (or at least, appear). Could you enjoy the apparent “wealth” of living in a $250,000 home, if you hadn’t first been able to go into debt for a mortgage? Could you enjoy the apparent “wealth” of driving a new car, if you couldn’t first go into debt for an auto loan at the bank? Our apparent wealth is a function of each debtor’s capacity to make promises rather than engage in productive work. As an extreme example, think “liar’s loans” (people who couldn’t possibly repay their loans were still entitled to move into expensive homes based on mere “promises” to repay).

3) The governments and creditors of the world should have a vested interest in restricting debtors’ access to bankruptcy laws. If debtors can’t file for bankruptcy, they can’t destroy the debt and debt-instruments that support the debt-based monetary system.

This article advances an hypothesis that’s both new and unclear–at least, to me. The article is overly long (3,700 words) because I’m not only trying to explain my hypothesis to you, I’m also trying to explain it to myself.

In the process, I use numbers in this article, but those numbers aren’t intended to accurately reflect reality—they’re only intended to illustrate principles relevant to my hypothesis.

I’m not claiming that this hypothesis is true. In fact, it might be seriously flawed or even absurd. I’m only claiming that it might be interesting and even roughly correct.

Most people don’t understand that we live in a financial world characterized by:

1) “fractional reserve banking”; and,

2) a “debt-based monetary system”.

Neither of those two concepts are well-understood by most people. The term “fractional reserve banking” might be vaguely recognized by most people, but seldom understood. The term “debt-based monetary system” hasn’t even been heard of by most people and isn’t understood by even one in a thousand.

Insofar as we recognize either term, we tend to regard them as two distinctly different, and unrelated concepts.

But I begin to see that those two concepts are no more unrelated than the two sides of a coin. In fact, I begin to suspect that neither characteristic could exist without the other and that, together, they comprise the backbone for the current financial system of the US, the world, and perhaps even the New World Order.

John Exter (A.D. 1910 – A.D. 2006) was an American economist, member of the Board of Governors of the United States Federal Reserve System, founder of the Central Bank of Sri Lanka, vice president in charge of international banking and precious metal operations for the Federal Reserve Bank of New York, senior vice president of the First National City Bank of New York (then the world’s second largest bank; now Citibank) and a member of Council on Foreign Relations.

Mr. Exter was “connected” to banking. He worked the banking industry around the world and was equipped by education, intelligence and position to truly know how the “system” works.

• Exter is best known for creating “Exter’s Inverted Pyramid”—a graphic used to illustrate the organization and comparative value of asset-classes measured in terms of risk and size.

In Exter’s theory, gold forms the Inverted Pyramid’s small base as the most reliable value. Successively higher “asset classes” are increasingly larger (in terms of nominal value) but also increasingly risky. At the broad top of the Pyramid, investors may have almost no chance of being paid in full.

The expansion of $100 through fractional-reserve banking with varying reserve requirements. Each curve approaches a limit. This limit is the value that the money multiplier calculates. (Photo credit: Wikipedia)

A few of us have foreign bank accounts. Many of us wish we had foreign bank accounts. No one would want the inconvenience of a distant, foreign bank account unless they didn’t trust their domestic banks or government.

In virtually every case, the primary motive for seeking a foreign bank account is our distrust in domestic banks. Because we fear the loss of our wealth to domestic inflation, high taxes or perhaps confiscation by our own government, we seek to deposit our funds in the “safety” of foreign banks.

However, the “Cyprus Crisis” has taught us that foreign banks may be even more dangerous than domestic bank accounts. As a result, we should rethink our desire to open or maintain an account in a foreign bank.

For example, TheEconomicCollapse.com published an article entitled “Words Of Warning: Get Your Money Out Of European Banks”:

“If you still have money in European banks, you need to get it out. This is particularly true if you have money in southern European banks. One thing has become abundantly clear: at least some Cyprus depositors are going to lose a substantial amount of money. Personally, I never dreamed that they would go after private bank accounts in Europe, but now that this precedent has been set it should be apparent to everyone that no bank account will ever be 100% safe ever again.

“Without trust, a banking system simply cannot function, [however] trust in the European banking system has been shattered and that people need to get their money out of those banks as rapidly as they can.”